Li & Fung Drops on Operating Profit Decline

By Vinicy Chan -
Jan 14, 2013

Li & Fung Ltd. (494), the world’s largest
supplier of clothes and toys to retailers, fell the most in five
months in Hong Kong trading as operating income slumped 40
percent last year because of weaker orders at its U.S. business.

The stock dropped 15 percent to close at HK$11.74, the
biggest decline since Aug. 10. About 255.3 million shares
changed hands, more than 10 times the three-month average.

A slower-than-expected recovery at the U.S. unit
contributed to the profit decline, Li & Fung said in a
preliminary earnings statement on Jan. 11. The Hong Kong-based
supplier to Wal-Mart Stores Inc. (WMT) said in August that sales
growth in the U.S. trailed its expectations because of weaker
consumer spending.

“Li & Fung is still a quality company, but I think it will
take two to three years for them to turn around the U.S.
business,” said Tanuj Shori, a Hong Kong-based analyst at
Nomura Holdings Inc., who cut his rating on the stock to reduce
from neutral after the profit warning.

U.S. Troubles

U.S. retailers have relied on discounts to boost sales with
unemployment close to 8 percent. In December, 4.8 million
Americans were out of work for six months or more, according to
the Labor Department.

“Several brands in this business, it seems, have run into
trouble and appear to be chronically under-performing,”
Barclays Plc analyst Vineet Sharma said in a Jan. 14 research
note to clients, referring to company’s U.S. unit.

Li & Fung got about 60 percent of its revenue from the U.S.
in 2011, data compiled by Bloomberg show. Analysts on average
forecast 2012 operating profit of $885 million for the company,
according to 16 estimates compiled by Bloomberg before the
company issued the statement.

Net income in 2012 is “unlikely to exceed” the previous
year, Li & Fung said, citing a preliminary review. It reported
earnings of $681 million in 2011. This would be the first time
since 2008 that Li & Fung’s annual profit hasn’t risen,
according to data compiled by Bloomberg.

Dow Famulak replaced Richard Darling as president of the LF
USA business effective Dec. 19, the supplier said. Famulak was
president of the company’s DSG unit, a dedicated sourcing group
servicing Wal-Mart globally, according to Li & Fung’s 2011
annual report.